BILL ANALYSIS AB 2940 Page 1 Date of Hearing: April 9, 2008 ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL SECURITY Ed Hernandez, Chair AB 2940 (De Leon) - As Amended: April 3, 2008 SUBJECT : Retirement: California Financial Advantage Account Program. SUMMARY : Creates the California Financial Advantage Account Program (CFAAP), under the administration of the California Public Employees' Retirement System (CalPERS) to provide retirement savings opportunities to California's private sector employees. Specifically, this bill : 1)Establishes, under CalPERS, the CFAAP intended to promote greater retirement savings for Californi private employees in a convenient, low-cost, and portable manner. 2)Requires CalPERS to offer one or more individual retirement accounts or annuities (IRAs) to eligible employees or eligible employers. 3)Defines "eligible employee" to mean a person with an annual income at or below 400% of federal poverty level. 4)Requires CalPERS to initiate, implement, maintain, and administer the CFAAP, as specified, including employing staff and contracting with third-party administrators as necessary. 5)Specifies that administrative expenses are to be paid from contributions or investment returns, to the extent permitted under federal law, except for expenditures that are provided through an appropriation from the Legislature. 6)Requires CalPERS to make reports to the Legislature and to participating employers and individuals on the status of the CFAAP. 7)Requires CalPERS to establish a process to allow an employer to forward employee contributions to the CFAAP through the Employment Development Department system currently used to collect payroll taxes. AB 2940 Page 2 8)Requires CFAAP to be designed to allow employers to make contributions on an employee's behalf or to match an employee's contribution. 9)Requires CalPERS to obtain the necessary approvals from federal authorities, as specified, to ensure that the implementation of the CFAAP does not jeopardize the status of the existing retirement program for public employees. 10)Indemnifies, from the General Fund, and holds harmless CalPERS board members and employees, and investment managers under contract with CalPERS, with regard to any decisions or actions made in connection with the CFAAP, as specified. 11)Specifies that the CFAAP will only be made available once CalPERS receives all the approvals it deems necessary. EXISTING LAW establishes CalPERS to provide pension and health benefits to a variety of public employees, including state, local agency, and classified school employees. Existing federal law provides for tax-qualified retirement plans and individual retirement accounts or individual retirement annuities by which private citizens can save money for retirement. FISCAL EFFECT : Unknown. COMMENTS : The following information was provided by the author's office: Currently, more than 70 million American workers do not participate in an employer-sponsored retirement savings plan. The numbers are more staggering for Californians. Today, six million California employees, 41% of the state's workforce, work at a job that does not offer a pension or a retirement savings plan to supplement Social Security. As a result, approximately 40% of today's baby boomers rely on Social Security benefits for more than 90% of their income. However, Social Security payments alone, which average to $901 per month in California, will not be enough to sustain Californians in their retirement. This lack of retirement savings may equate to a higher cost for government services, as seniors without savings will be more likely to require AB 2940 Page 3 government assistance with housing, medical care and other necessities. Particularly, investments in savings accounts from small business, low-income, and/or short-tenured and transferable employees are exceptionally low. Only 48% of part-time workers participate in a retirement savings plan. Nearly 65% of low-income workers-those earning less than $40,000-do not participate in employer plans. Often, complexity and cost on administering retirement systems prevent many small companies from creating retirement plans for their employees. A majority of firms with fewer than 500 employees nationwide do not offer retirement savings options. Moreover, though some workers may currently participate in a retirement plan, if that worker moves into a new job with a new business, they often lose access to that same plan. The result is gap coverage. Workers today are spending more than they are saving, relying more on credit, and thus accruing debt and risking their future financial security. Nationally, the personal savings rate for individuals has fallen to 0.5 percent of one's income for 2007. At this rate, even with Social Security benefits, Californians will not be able to afford retirement. Our savings habits must change, and even a small monthly contribution can create a great financial advantage for Californians. For example, if a 25 year-old saved $100 a month, or $1,200 annually, with a 6.9% rate of return she would have $233,474 at age 65. California workers need a seamless, lifelong retirement savings system, providing them with the opportunity to build their assets and help attain their financial stability through a secure, portable savings account. The California Employee Savings Program will create an option and system to do so, supplementing existing savings options for its workers, at no cost to taxpayers. While a few states have begun assessing these possibilities, e.g. Washington, Illinois, California would be the first state in the nation to implement and provide this opportunity. AB 2940 Page 4 The Committee is informed that the author will be offering amendments in Committee to change the name of the program from the CFAAP to the California Employee Savings Program and to delete the maximum annual income eligibility threshold in order to create a broader opportunity for employees to participate in additional investment options. REGISTERED SUPPORT / OPPOSITION : Support New America Foundation (Sponsor) California Small Business Association Sacramento Asian Pacific Chamber of Commerce Small Business California Opposition None on file Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916) 319-3957